Estonian tax changes in 2025: a comprehensive guide
Last year, we’ve covered the major changes in the Estonian tax landscape for 2024-2025; now we are bringing you new changes that are going to take place next year.
As Estonia continues to evolve its tax system, several significant changes are scheduled for 2025. This article outlines the key modifications affecting both businesses and individuals.
Value-Added Tax (VAT) Changes
New VAT rates and implementation timeline
Estonia is introducing significant changes to its Value-Added Tax system in 2025, with modifications occurring in two main phases. The first phase begins January 1, 2025, focusing on reduced rates, while the second phase implements a higher standard rate mid-year.
Standard rate adjustment:
The standard VAT rate will increase to 24% effective July 1, 2025
This represents one of the most substantial VAT rate changes in recent Estonian tax history
Businesses will need to adjust their pricing and accounting systems to accommodate this change
Reduced rate modifications (from January 1, 2025):
Accommodation services and accommodation with breakfast: Increase from 9% to 13%
Press publications: Increase from 5% to 9%
These changes aim to align Estonian VAT rates more closely with European standards while maintaining some preferential treatment for specific sectors
VAT registration and compliance updates
Significant changes to VAT registration requirements will provide more clarity and flexibility for businesses.
International operations:
Companies operating exclusively outside Estonia with 0% taxable turnover will be exempt from VAT registration
This simplification reduces administrative burden for businesses focused on international markets
Insurance and financial services turnover will now be included in registration threshold calculations
Small business scheme for EU operations:
New threshold: €100,000 EU-wide annual turnover
Benefits:
Exemption from mandatory VAT registration in other EU countries
Simplified compliance requirements
Reduced administrative burden for small businesses
Key requirements:
Separate applications needed for each EU country
Loss of scheme rights if country-specific thresholds are exceeded
Complete scheme ineligibility if EU turnover exceeds €100,000 in the following year
Limitations:
Input VAT cannot be deducted under this scheme
Businesses must carefully monitor their turnover across all EU operations
Practical implications for businesses
System updates:
Businesses need to update their accounting and point-of-sale systems
Review and adjust pricing strategies to accommodate new rates
Update invoice templates and tax calculation methods
Compliance considerations:
Review current VAT registration status and requirements
Assess eligibility for the small business scheme
Plan for potential registration in other EU countries if needed
Financial planning:
Evaluate impact on cash flow
Consider pricing adjustments to maintain margins
Plan for potential increased administrative costs
Timeline for implementation:
Prepare for reduced rate changes by January 1, 2025
Plan for standard rate adjustment by July 1, 2025
Consider phased implementation of system updates
Personal Income Tax Modifications
The year 2025 brings substantial changes to Estonia's personal income tax framework, affecting both residents and non-residents in various ways.
Tax rate changes and basic exemption
New rate structure:
Base income tax rate increases to 22% (from current 20%)This change affects all types of personal income including:
Employment income
Business income
Rental income
Capital gains
Other taxable income sources
Basic exemption framework:
Monthly basic exemption remains at €654
Annual maximum exemption: €7,848
Important considerations:
Applies to Estonian tax residents only
Must be declared appropriately in tax returns
Cannot be transferred between family members
Non-residents generally cannot claim this exemption
Implementation timeline:
The planned unified tax-free income of €700 is postponed to 2026
This delay allows for better system adaptation and transition planning
Dividend taxation overhaul
Significant changes to dividend tax structure:
Elimination of the reduced 14% rate for regular dividend payments
Removal of the 7% withholding tax on reduced-rate dividends
New dividend tax rate of 22/78 (approximately 28.21% on net distribution)
Impact on business owners:Higher effective tax burden on dividend distributions
Need for revised profit distribution strategies
Importance of timing dividend payments
Consideration of alternative remuneration methods
Practical considerations:Review of existing dividend policies
Assessment of tax efficiency
Planning for increased tax liability
Evaluation of alternative profit distribution methods
Funded pension updates
The 2025 pension reforms introduce a more flexible contribution system while maintaining the fundamental structure of Estonia's pension scheme.
New contribution structure:
Three-tier option system:
2% contribution rate (default option)
4% contribution rate
6% contribution rate
Implementation details:
Automatic enrollment at 2% unless otherwise specified
Option to change rates through formal application
Changes effective from January 1, 2025
Considerations for contributors:
Assessment of personal retirement needs
Impact on monthly take-home pay
Long-term investment strategy
Business expense allowances
The 2025 updates bring significant increases to various business expense allowances, providing more flexibility for companies.
Business trip allowances
Foreign business trip daily rates:
First 15 days: Increased to €75 (50% increase)
Subsequent days: Raised to €40 (25% increase)
Documentation requirements:Proper recording of business trip purposes
Maintenance of supporting documents
Clear separation of business and personal expenses
Compliance with reporting deadlines
Vehicle and health expensesVehicle use compensation:
New rate: €0.50 per kilometer
Monthly maximum: €550
Requirements:
Detailed journey logs
Business purpose documentation
Regular vehicle expense tracking
Health promotion benefits:
Annual allowance: €400 per employee
Eligible expenses:
Sports activities
Medical check-ups
Health-related services
Wellness programs
Entertainment and promotional expenses
Guest entertainment:
Monthly limit increased to €50
Qualifying expenses:
Business meals
Entertainment events
Client hospitality
Promotional gifts:
New limit: €21 (excluding VAT)
Requirements:
Business branding
Proper documentation
Receipt retention
Looking ahead: security tax package (2026-2028)
This comprehensive tax package represents a significant shift in Estonian tax policy, aimed at strengthening national security funding.
Business Impact
Corporate tax structure:
2% tax on annual profits
Quarterly advance payment system:
Payment dates: September 10, December 10, March 10, June 10
Based on previous year's profits
Refund mechanism for overpayments
Exemptions and special cases:
Tax-exempt status for qualifying dividends (10%+ ownership)
Foreign-taxed profits exemption
Special provisions for non-calendar financial years
Individual Impact
Comprehensive coverage:
Additional 2% tax on all income types
Total effective rate: 24% (22% + 2%)
Application to both residents and non-residents
Implementation details:
Employer withholding requirements
Individual reporting obligations
Payment deadlines and procedures
Administrative requirements
Reporting obligations:
Annual profit declarations
Nine-month submission deadline
Detailed documentation requirements
Compliance monitoring systems
These VAT modifications represent a significant shift in Estonian tax policy, requiring careful preparation and planning by businesses of all sizes. With Enty, you can ease up all accounting and tax problems for your company in Estonia. Explore our subscriptions and start 2025 without tax and accounting headaches.
